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Suzlon: Potential risks to the business - Views on News from Equitymaster

Suzlon: Potential risks to the business

Mar 26, 2009

It has become evident in recent times how risks inherent in a companyís business model must always be paid attention to before investing. Even if they may not be hampering the performance of the business in any way during a particular point in time, they always have the possibility of showing up in future. And when that happens, their effect on the company can range from a short term dampening of the profits to actually bringing the entire company down to its knees.
Suzlon is clearly one such example. Over the past two years, its profits have taken a big hit due to some such factors. Here we will discuss some such factors that have affected the company in the past, and also the ones that have the potential to affect it in future.

A wind farm project typically requires higher upfront capital investment per unit of energy produced as compared to fossil fuel based power plants. Thus, the terms of financing that customers of the company can obtain for wind power projects has a significant influence on demand for setting up wind farms. This makes the business sensitive to interest rates and availability of financing for wind farms.

In recent times, the governments of most countries for various reasons have supported and incentivized generation of power from renewable sources like wind. If such support initiatives were to be stopped or decreased, wind power will substantially get negatively impacted.

Many local communities impose restrictions on the construction and operation of wind power projects due to undesirable factors like noise pollution and for being aesthetically unappealing.

The global market for WTGs (Wind Turbine Generators) involves rapidly evolving technology, which Suzlon needs to constantly keep pace with, failure of which could cause it to lose customers to competition.

Many players in the global wind energy industry have longer industry experience and greater financial, technical, personnel, marketing and other resources. These may in future pose a potential threat to Suzlon.

The demand for electricity in India and in international markets such as the US and China is closely linked to economic growth in these countries. If either the Indian economy or the economies of major international markets have a prolonged economic downturn, overall demand for electricity and demand for renewable energy sources such as wind power in particularly are likely to decrease.

The demand for wind power plants is dependent on the cost of wind generated electricity compared to electricity generated from other sources of energy. Thus an increase in cost competitiveness or a leap in technology for other sources of power generation would have an adverse impact on the demand for Suzlonís products.

The viability of wind power is dependent on the wind patterns which are not constant and can vary over a period of time. For this reason, WTGs are generally not considered as top priority and the only source of electricity which can limit its growth prospects in future.

If wind patterns at sites previously identified as suitable for wind farm projects change, already installed wind farms may become redundant causing harm to the attractiveness for a customers to set up wind farms.

Fluctuations in the value of the rupee against other currencies can adversely affect the cost of borrowings and repayment of debt, the costs of raw materials and revenues from exports. The company has already been witnessing mark to market forex losses due to the severe fluctuations in the rupee dollar rate in recent times, which have significantly dented its profits.

As part of its business model, Suzlon provides its customers with a generation warranty for each WTG purchased. As such, product defects or warranty claims claimed by customers can take away from the future profits of the company. The company has already faced this problem in recent times with many of its WTG blades developing cracks, thus requiring the Suzlon to replace the equipment and also compensate the customer for loss of revenue, thus eating into the profits of the company.

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